Pound Sterling's troubles are not yet over, according to TD Securities, whose analysts say the British currency is still vulnerable to a resilient Dollar that's tipped to remain in rude health at least until the mid-year point.

Economies, exchange rates and all financial markets have been turned on their heads this year by the coronavirus that escaped China's borders in January and spread quickly across the globe, culminating in an eventual declaration by the World Health Organization (WHO) of a global pandemic that's since brought advanced and developing economies alike to a standstill and which now threatens to deal an unprecedented blow to global growth this year.

Markets entered 2020 in an upbeat mood and with investors looking for the January signing of the U.S.-China trade accord to prompt a slow but steady growth recovery beyond the borders of the U.S., which had been largely immune to the damage wrought on the global trade sector by the tariff fight that raged between the world's two largest economies between then and early 2018.

That growth recovery was expected to play out in the shadow of another bitter and hard fought U.S. presidential election that was widely tipped to bring a racous U.S. Dollar back down to earth and enable other currencies to wriggle out from under the greenback's boot. But barely three months on and everything has changed profoundly, with once untouchable U.S. stocks having fallen from historic peaks into bear market territory within a record time of just five weeks.

The effect of this and the challenge now facing policymakers across the world, as it relates to the outlook for ecomic growth, perceptions of fair value for all financial assets and the pysche of investors cannot possibly be understated. However, and despite the high double-digit percentage losses imposed so far, some risk assets like U.S. stocks and their valuation multiples have fallen only back to their pre-Trump era levels and for this reason, there could still be further downside to play out in the months ahead.

Meanwhile the Dollar Index, a widely used benchmark of the world's reserve currency measured against six of its most frequently traded counterparts, has traded within an exceptionally wide 8.5% range between March 10 and April 01. This, and the nature of the threat facing the global economy which is unprecedented in modern times, makes for a particularly perilous environment for those who have exposure to exchange rate risk.

Pound Sterling

TD Securities says "whatever was left of last year's "Boris Bounce," in the economy and British currency is now gone but that recent losses mean there is already a lot of bad news baked into the price of the Pound.

The bank says that with the UK having gone into 'lockdown' in late March the spread of coronavirus should soon begin to slow and that in the interim, Sterling is likely to take its cues from the direction of the broad Dollar which is expected to rise over the coming months.

The Pound-to-Dollar rate is seen falling to a low of 1.18 by the end of June before rising back to 1.26 before the curtain closes on 2020. However, and given expectations of similar weakness in the EUR/USD rate, the Pound-to-Euro rate is forecast to follow a rough sideways path through the balance of the year. Sterling is seen dipping from 1.1329 Wednesday to 1.1238 by the end of June before rising to 1.1296 in time for year-end.

"Contagion should slow with the UK now in lockdown, allowing for a quicker rebound in the economy despite near-term headwinds. Cable is likely to track the broader USD, but we see scope for GBP to rebound on certain key crosses, such as against the EUR," says Mark McCormick, head of FX strategy at TD.

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U.S. Dollar

The big Dollar has been the only real winner from the coronavirus crisis and is expected to remain so for at least the next few months, although gains are likely to be slower to accrue to the U.S. currency now the Federal Reserve (Fed) has taken such strong action to reign in the rise in American exchange rates.

The Fed has cut U.S. rates to the zero lower bound, launched an unlimited quantitative easing programme and offered Dollar swap lines, or otherwise cheap Dollars, to any central bank that will take them in order to ease 'funding pressures' that were seen driving a viscous Dollar surge back in March.

"This dash for cash has been the single biggest driver of the USD over the past few weeks. Even if we are in the process of moving out of the acute phase of the shock, we don't think the USD has topped yet. Policymakers have likely eased the pace of the USD rally, reducing the prospects of further stress in the financial system. Still, the directional bias in the USD runs higher until the public health crisis peaks," McCormick says.

TD forecasts the Dollar will rise against all major currencies other than the Japanese Yen in the months ahead, with the greenback even seen getting the better of the typically safe-haven Swiss Franc. USD/CHF is tipped to rise to 0.9809 by the end of June while the USD/JPY rate is seen falling to 1.07.

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Euro

The Euro has been on a roller-coaster ride having entered 2020 on the back foot before being lifted 6% against the Dollar through early March only to more than unwind those gains heading into month-end. Investors scrambling to exit bets on higher-yielding emerging market currencies that had previously been financed through the borrowing and selling of the Euro were seen driving price action.

TD Securities sees more losses lurking on the path ahead for the Euro-to-Dollar rate, which is tipped to fall to 1.05 by the end of June before recovering to 1.12 before year-end. Meanwhile, the single currency is seen declining further against the Swiss Franc as well as Swedish Krona and Norwegian Krone. It's forecast to track sideways against Pound Sterling.

"The EUR blends a fine line between an alternative reserve currency (and thus a haven) and a procyclical one. The latter ties its fortunes to the state of the global economy, where European growth should contract at a faster pace in the months ahead," McCormick says.

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Australian Dollar

The commodity-backed and riks sensitive Australian Dollar has been punished almost as much as the oil-linked and virus-blighted Norwegian Krone in the coronavirus sell-off which, in mid-March, saw the AUD/USD rate quoted at its lowest level since January 2003.

Australia's commodity-heavy economy means the Aussie currency would always be among the first and foremost casualties of any global economic downturn, as it has been in 2020, but the resulting relationship with investor risk appetite is a double-edged sword for the antipodean unit. In other words and while the Aussie can often be the first to suffer in times of turmoil, it's also among the first to rebound when the dust settles on the disaster in question.

That relationship is especially pertinent in 2020 because the Aussie had already suffered a punishing sell-off over the two years before 2020 and with the coronavirus crisis having started in China, where the virus has now been all but stamped out domestically, the world's second largest economy could well be the one that leads the global rebound out of the depths of depression. This could see the Aussie following the Yuan higher.

TD forecasts suggest that the bottom is already in for the AUD/USD rate, which was quoted at 0.6060 on Wednesday, with the end-June milestone likely to see the Aussie trading around current levels before an anticipated recover to 0.62 plays out in time for year-end. This is expected to push the Pound-to-Australian Dollar rate down from 2.0440 on Wednesday to just 1.9666 in time for the end of June although the exchange rate is tipped to rise back to 2.0322 by year-end.

"By virtue of high trade linkages to Asia — where they are assumed to be further ahead in "flattening the curve," that might be more supportive for AUD sooner than most currencies as supply chain disruptions are relaxed. The caveat is that hopefully, we don't see a spike a CV-19 across the region. That said, if things slowly come back online, AUD be one of the first in the complex to indicate some element of 'normalization' in the global economy," McCormick says.

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New Zealand Dollar

The New Zealand Dollar story is almost an exact replica of the Australian Dollar story given how both are commodity-backed antipodean currencies whose largest export customer is China, the source of the coronavirus outbreak and first country to turn the page on the deadly viral pneumonia.

New Zealand's Dollar has fallen some 14.14% agains the U.S. Dollar this year while the Pound-New Zealand Dollar rate had risen 7% for 2020 on Wednesday. This too has also now likely seen its low point against the U.S. Dollar, having revisited 2008 lows beneath 0.55 last month, with NZD/USD now tipped to retreat back to 0.58 by the end of June before finishing the year up at 0.60.

The Pound-New Zealand Dollar rate, on the other hand, is seen dipping 2.0975 on Wednesday to 2.0344 by the end of June before rising back to its recent high of 2.10 in time for year-end. TD says a turnaround in investor risk appetite will be key to a sustained recovery by the Kiwi currency.

"NZD will largely be a price taker in this environment. We think it slugs around the new cyclical lows until macro and risk asset stability emerge. This leaves AUDNZD anchored around 1.03 over the coming weeks, which also jives with our HFFV gauge," McCormick says.

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Canadian Dollar

The once illustrious Canadian Dollar has fallen from grace with investors at a rate of knots since the true scale of the coronavirus problem in China became clear and as the threat posed to the global economy became unavoidable.

Coronavirus has not only put the Canadian economy into the same kind of 'lockdown' seen in many other parts of the world but has also sent the price oil, a significant breadwinning industry in Canada, crashing back to its new millenium boom-to-bust lows. This value destruction in the oil market could leave a mark on Canada's economy that takes years to fade given that business investment and its resulting augmentation of economic growth has never fully recovered from the last severe downturn.

TD Securities is a seller of the Canadian Dollar and tips the USD/CAD rate to rise from around 1.42 to 1.47 before the end of June, although its sees 1.40 as a likely floor for the exchange rate going forward. Not so long ago, in fact as recently as December 2019, levels above 1.40 might have seemed inconceivable to Canadian Dollar traders given that back then the Loonie was propped up by the developed world's highest cash rate and its economy had outperformed many major counterparts.

That best-in-class cash rate is long gone now the Bank of Canada has cut it to 0.25% and launched for the first time, a quantitative easing programme. The latter will see the BoC buy around 1% of Canadian government debt each week for the foreseeable future, crushing yields and also the Canadian Dollar. The GBP/CAD rate is seen dipping from 1.7592 on Wednesday to 1.7347 by the end of June before rising to 1.7642 in time for year-end.

"The global demand shock (and remnants of a 2008-style credit crunch) have exposed the leverage concerns that have bubbled under the surface for years. It's unlikely to spillover into a systematic issue but a full stop of consumer spending will dent the housing market along with other collateral damage. The oil shock has pushed the price of WCS below transport costs, adding pressure to an already weak system. Combined this backdrop plus a current account deficit implies that 1.40 is a floor for 2020," McCormick says.

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